July 21, 2010

Morgan Stanley Raises Profits as Wealth Unit Sees Outflows

On average, AUM per broker at Morgan Stanley are $83 million vs. about $92.5 million at Merrill Lynch

Morgan Stanley announced Wednesday, July 21, that its global wealth management clients withdrew net $5.5 billion during the second quarter, including net outflows of $7.9 billion in the United States and net inflows in overseas offices of $2.4 billion.

In the first quarter, the wealth-management operations had net inflows of $9.3 billion.

"It was a tough environment for retail investors, especially post-flash crash," said CFO Ruth Porat in a conference call with equity analysts, adding that clients often withdraw funds during tax season.

Morgan Stanley CEO James Gorman stated several months ago that the company's goal is to boost client assets by $20 billion.

The company's total client assets of $1.5 trillion at the end of June were down 6 percent from the first quarter, but topped last year's $1.42 trillion.

During the July 21 call, Gorman said that Morgan Stanley is "not overly concerned" with the $5.5 billion outflow. This represents about $10 million in revenue per quarter of $40 million in yearly sales, he adds.

Rival Merrill Lynch reported some $1.4 billion in client balances for the second quarter, down from the first quarter by about $50 million and up by about $80 million from the year-ago quarter.

The number of Morgan Stanley financial advisors - including those involved in the joint venture with Smith Barney -- fell by about 50 to 18,087 during the quarter from the previous period. It declined by 2 percent from the second quarter last year, when the firm had 18,444 FAs.

Morgan Stanley has a 51% interest in the joint venture with former-Smith Barney owner Citigroup.

Advisor turnover in the top two performing quintiles (or the upper 40% in terms of fees and commissions) "is low," according to Porat. In terms of the movement of teams out of Morgan Stanley Smith Barney, she says there "isn't much."

In early July, MSSB attracted two teams from UBS in New York and Canton, Ohio, for instance, while in late May it lost a Charlotte, N.C.-based team to Baird.

Average revenue per adviser also fell slightly, to $679,000 from $685,000 in the first quarter. It grew slightly over the same period last year, when average sales per broker were $671,000.

In its second quarter, Merrill Lynch had 15,142 financial advisors vs. 15,005 in the previous quarter and 15,008 a year ago.

Merrill Lynch FAs had average sales of $853,000 vs. $823,000 a year ago.

Morgan Stanley said it closed 24 brokerage branches globally during the quarter as part of its Smith Barney venture. It now has 881 branches.

One average, assets under management per broker at Morgan Stanley are $83 million vs. about $92.5 million at Merrill.

Morgan Stanley's wealth division posted a profit of $110 million, an 11% from the first quarter, on flat net revenue of $3.1 billion.

The pretax profit margin fell to 7% from 9% during the first quarter. Again, Gorman had given an aggressive target for the 2010 performance in this area: 20% over the next year or so.

"We still expect to meet this target at the end of the integration," said Porat, though - like other targets, such as a $1.1 billion cost savings - it is being pushed out from 2010. "These are valid targets, but it's a question of timing," she explained.

In terms of the integration of Smith Barney, "The focus is on getting a series of steps done, which we are, and keeping the sales force stable, which it is, and giving the clients what they want," he said during the analysts' call.

Companywide, Morgan Stanley (MS) reported income of $1.4 billion, or $0.80 per share, for the quarter ended June 30, compared with a loss of $138 million, or $1.36 per share, for the same period a year ago.

Net revenues were $7.95 billion for the current quarter vs. $5.2 billion a year ago.

Including discontinued operations, the company reported EPS of $1.09 vs. a net loss of $1.10 last year. Discontinued operations included an after-tax gain of $514 million related to the sale of the retail asset management business, including Van Kampen Investments to Invesco.

Analysts had expected earnings of $0.46 a share on sales of $7.93 billion.

Earlier this week, Morgan Stanley Smith Barney appointed James Tracy as chief operating officer of distribution and development for wealth management in the U.S. and Douglas Ketterer as head of its private-wealth management unit in the U.S.

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